Nova debenture holders should oppose the proposed Section 155 Scheme of Arrangement, which would see their current debentures converted into shares in a company that may never list on the JSE.
The scheme is not in the interest of debenture holders, as many debenture holders would see massive dilutions of their investments. An approval of the scheme will also see debentures losing their existing security rights currently attached to their investments.
The scheme will seemingly benefit the current directors and shareholders of Nova PropGrow (formally Nova Property Group Holdings) the most.
The scheme, crafted by Nova chairman Connie Myburgh, is extremely complex and threatens debenture holders that it is the only alternative to liquidation. Unfortunately, its complexity is unnecessary, but this complexity serves to obscure several highly questionable provisions that may put debenture holders in even more trouble than they would be under the current regime.
The proposed scheme has four core problems. Moneyweb has asked Myburgh on various occasions to provide some insights on these apparent anomalies, but he has refused to comment.
Problem 1: The dilution of debenture holders’ shares
Debenture holders will see a significant dilution of the value of their investments, while losing the preferential rights they currently have via their debentures. The dilution varies for the classes of debentures. Debentures and their dilution are linked to the original Sharemax properties the investors invested in. The biggest losers will be those who have invested into the Villa and Zambezi, who would only receive 15% and 20% of their original investments. An investment of R1 000 000 in the Villa would be reduced to around R145 000.
Debentures linked to other properties will see a better conversion ratio, as disclosed in this article. The formula also excludes all accrued interest. And to exacerbate this issue, instead of each class of debenture holders being given a chance to vote separately on the dilution applicable to them, all debenture holders are aggregated into a single class meeting. It is doubtful that this is what is intended by section 155 of the Companies Act, under which section the scheme has been convened.
Problem 2: The listing is not a condition of the scheme
The Nova board hails the listing as a silver bullet for former Sharemax investors to receive shares in a JSE- listed company, as they would be able to trade these shares and realise at least a portion of their initial Sharemax investments. The reality is that it is not clear whether the JSE will allow Nova to list in its current form.
Nova hasn’t applied for a listing or issued a prelisting statement. The company’s most recent financial statements were restated due to gross overvaluations of properties, while a Reportable Irregularity was filed with IRBA due to non-compliance with the Companies Act (Nova addressed this.). Nova’s auditor BDO has also since resigned as the auditor.
The scheme documentation clearly states that the implementation of the scheme will continue if debenture holders approve the scheme, even if the JSE refuses to allow a listing. This is the single-biggest risk for debenture holders as in this potential scenario, the debenture holders will receive shares in an unlisted company without any of the underlying property assets. The scheme provides that the listing is subject a condition precedent that the debenture holders will be issued with listed shares, but then another paragraph in the scheme document contradicts this, by stating the scheme will proceed even if a listing is not granted. A closer evaluation shows that on any basis, the scheme will be implemented with unlisted shares and the debenture holders will simply have to hope that a listing is applied for and approved in the future.
Problem 3: No commitment from founding shareholders to transfer properties
The third grave concern is the absence of a clear explanation of how the properties will be transferred to the new company that may or may not list on the JSE. The absence of this explanation of how current shareholders (read Myburgh, Haese and the other directors) of Nova PropGrow, the company that owns the underlying properties, will sell their shares to the new company is telling. Nova went to great lengths to explain the conversion process for debenture holders, but doesn’t say a word in the scheme documents of how the scheme will affect the directors’ shareholding in the company that actually owns the properties.
However, the Nova board alluded to this process in two different documents, but gave two different versions of what may happen.
In the communiqué to debenture holders (dated March 22 but issued on October 30), the board states that:
“Current shareholders in Nova PropGrow (previously Nova Property Group Holdings Limited) will shortly, by letter, be invited to convert their unlisted shares in Nova PropGrow on a one-for-one basis, for Nova Holdings Listco listed shares, which will be allotted and issued to the shareholders by the official Transfer Secretaries of Nova Holdings Listco, to be announced shortly as stated above, after the listing of Nova Holdings Listco, in the normal course.” (Author’s emphasis.)
In stark contradiction, Nova says in a letter sent to the 2 000 former Sharemax investors who elected Nova shares, that an agreement between Nova Nominees, the company which holds the shares on behalf of the founding shareholders, has been concluded with Nova PropGrow to convert their shares to Listco. The actual conversion process is however not disclosed.
Moneyweb was only able to find the Afrikaans letter, which states:
“… Nova Nominees Eiendoms Beperk B aandeelhouer, in Nova PropGrow, het ‘n ooreenkoms met Nova Holdings Listco aangegaan om sy aandele in Nova PropGrow om te skakel na aandele in Nova Holdings Listco.” (Author’s emphasis.) (Read the full letter here.)
What is of major concern is that it seems as if the Nova board directors have refrained from spelling out what they will do with their shares, as it has a significant impact on which entity will own the actual underlying properties. It seems, from the debenture communiqué, that they have a discretion on whether to convert or not. What is missing from the debenture scheme document is an irrevocable commitment from the controlling shareholders and directors to also take Listco shares, irrespective of whether or not a listing occurs. In other words, the directors ask the debenture holders to forego their debentures for shares in Listco, but give no commitment that they will do likewise.
Two scenarios are depicted in the graphics below if debenture holders approve the scheme, and how it would differ from the current situation.
Problem 4: No independent fair and reasonable statement
The fourth critical problem is the lack of an independent fair and reasonable assessment to inform debenture holders that the proposal serves their best interest. In my view, it is actually a highly unethical not to provide debenture holders with an independent fair and reasonable opinion.
Moneyweb believes that the proposed Section 155 Scheme of Arrangement is brought under the wrong section of the Companies Act, and that it should have been brought under Section 114.
The major difference is that under Section 155, it is not necessary to commission a fair and reasonable assessment, while it is compulsory under Section 114.
In theory, the proposal to list Nova is not a bad idea if done properly, and such a process should include the following steps:
The proper way a listing must be approached:
- Nova applies for a listing on the JSE and submits a prelisting statement or prospectus;
- Nova works with the JSE until the proposed listing is approved;
- The listing is a condition for the implementation of the Scheme of Arrangement;
- The directors and majority shareholders of Nova representing 100% of the voting shares must undertake to support the listing process;
- Two Schemes of Arrangements must be proposed, both under Section 114 of the Companies Act. One scheme must describe the conversion of investors’ debentures into shares, and the second must describe how the shareholding of Nova PropGrow will be transferred to Listco;
- These Schemes of Arrangements must be conditional of each other, as well as on the approval of the listing;
- The Nova PropGrow board must commission an independent fair and reasonable statement to assist debenture holders in their decision that this scheme is actually fair and to their advantage;
- Once all these formalities have been completed, as well as approval obtained from SARS and the Reserve Bank, the process can begin.
What should investors do?
My opinion is that the proposal in its current form is at the very least, irresponsible and not in the interest of debenture holders. Debenture holders should reject it.
It would also be a good idea to call a special debenture holders’ meeting and either replace the current trustee of the Nova Debenture Trust with someone that diligently represents debenture holders interests, or appoint additional trustees. There is currently not a single individual in any of the Nova structures who acts in the interest of debenture holders. This proposal is proof of this.
It would also be appropriate for debenture- and shareholders to attend the debenture meeting on Friday at 10h00 at the CSIR conference center in Pretoria. Debenture holders should also submit their proxy forms before 10h00 on Wednesday the 8th, or hand them in at Friday’s meeting.